Cryptocurrency is both unregulated and regulated. As a decentralized system, it is inherently unregulatable. However, as cryptocurrency becomes more mainstream, regulators are focusing on the regulatable points of intersection to the traditional financial system.
Classification
The U.S. Commodity Futures Trading Commission (CFTC) considers virtual currencies like Bitcoin and Ether to be commodities. As such, the CFTC claims jurisdiction over their futures and other derivatives. This means that cryptocurrency exchanges face strict customer protection and oversight regulations if U.S. residents are trading on them, regardless of where the exchange is based.
Exchanges
Although cryptocurrency is global and unregulated, the intersection of cryptocurrency and fiat currency is becoming much more regulated.
For certain types of cryptocurrency transactions, location matters. For instance, Kraken users may have certain restrictions on their account based on local financial regulations. Here is a Kraken list of geographic areas where use of Kraken’s services are either limited or restricted entirely. Note that residents of the states of New York and Washington do not have access to Kraken due to state regulations.
Binance is the largest cryptocurrency exchange in the world, but U.S. residents are not allowed to trade on Binance.
Taxation
U.S. tax authorities are now focusing more on taxation of cryptocurrency capital gains. In early 2021, the Internal Revenue Service (IRS) announced a special task force to identify cryptocurrency transactions. This effort has focused on Coinbase and Kraken, two of the U.S. based centralized cryptocurrency exchanges. The IRS successfully required Coinbase to disclose 13,000 of their users in 2016. As of 2021, Kraken will be obliged to provide the IRS with details about users engaged in transactions greater than $20,000. These requirements are based on U.S. court rulings. IRS Commissioner Chuck Rettig has said “There is no excuse for taxpayers continuing to fail to report the income earned and taxes due from virtual currency transactions.”
Banking
The OCC has issued guidance around banking activities related to cryptocurrency.
Here is a helpful summary of the OCC guidance from the law firm Barack Ferrazzano that highlights the three key elements of the OCC letters that “allow banks to custody cryptocurrencies (#1170), custody the dollar reserves for stablecoin issuers (#1172), and serve as an independent node and use blockchain technology to facilitate payments (#1174).”